Dalal Street Investment Journal - July 09, 2019

DSIJ.in JULY 8 - 21, 2019 I DALAL STREET INVESTMENT JOURNAL (^73)
T
he total corpus of mutual funds has increased due to the
large inflows from non-corporate investors after
demonetisation. The absolute growth between
September 2016 and March 2019 is around 50.6%. The major
chunk of the growth has come from equity corpus and
non-corporate debt corpus. Both the segments registered 118%
and 41% absolute growth.
Total Asset Under Management of Mutual Funds
Category As of Sep 2016 As of March 2019 Growth in % age
Non Individuals 727125.56 746083.71 2.61
Individuals 297179.29 419807.21 41.26
Total Debt 1024304.85 1165890.92 13.82
Equity and other schemes 555771.33 1213693.52 118.38
Total Corpus 1580076.18 2379584.44 50.6
Source: AMFI
The sudden surge in the mutual fund corpus and the NBFC
crisis has led to both the regular and the not-so-regular risks in
investments playing out concurrently.
Debt funds in India are sold by indicating the yield to maturity
of the portfolio, minus the expenses. The actual return is
generated, apart from interest accrual, by the capital gain or
capital loss due to yield movement. Of late, the default by some
of the debt papers, rating downgrading and large-scale
redemption in a particular scheme all led to a steep fall in the
NAVs of certain schemes from select fund houses, thereby
substantially eroding the returns generated.
Understanding Risks
Regular Risks: These are the usual known risks prevailing in a
debt market, i.e. duration risk, credit risk and liquidity risk.
However, what investors are currently experiencing is more of
credit risk. Currently, this type of risk has become a point of
concern for only select few schemes in certain fund houses. In
select cases, some of the structured products taking equity as
collaterals have further added to the standalone default issues.
Financial Planning
MF Page - 07
Debt Mutual Fund Schemes:
All Kinds Of Risks Playing Out?
For more information contact : B.V.R.Venkatesh Bapu, Director, Value Invest Wealth Management (I) Pvt Ltd. n Email: [email protected]
B.V.R.Venkatesh Bapu
Director, Value Invest Wealth
Management (I) Pvt Ltd
The rating and valuation risk which a debt paper faces is
another element which is hurting the debt market sentiments.
Many woke up to the fact that a debt paper rating can
materially impact the valuation of the underlying instruments
and consequently affect the return generated by the affected
schemes. Just like volatility in the equity market is a fact of life,
upgrades and downgrades too is a part and parcel of debt
market functioning. Whenever the rating goes below
investment grade, as per SEBI norms, there is a mark down of
75% on the NAV along with an extra mark down of 25% which
is at the discretion of the AMC, depending upon the exposure
to that instrument.
The valuation risk further gets compounded if the AMC fails to
manage its streams of net inflow into a particular scheme. This
is an important aspect because there are mutual fund schemes
which may have large investments from corporate investors. In
the event of a negative development, these corporates are likely
to redeem their investments at one go, a development that can
have a tangible effect on the NAV of a fund.
Mismatch of liquidity of schemes and liquidity of underlying
instruments: Large inflow into debt funds have led to investing
in instruments which are not as liquid as the scheme. When
borrowers use short term lending to fund their long term
lending, any failure to roll over leads to severe liquidity crunch,
ending up in solvency issues. In order to mitigate such liquidity
related risks, SEBI has brought about Over Night funds.
How should the investors avoid such risks when the
debt portfolio is built?
It is almost impossible to avoid all the risks. However, enough
homework should be done before building the portfolio to
minimise the impact of such risks which are going to be
common in the coming period.
Ways to Manage Risks
The following factors should be considered to avoid the above
mentioned risks:
n Schemes with high credit quality like AAA and AA
instruments.
n Schemes with well-traded instruments like banks and
PSUs, which have better liquidity and rating changes are
fe w.
n Avoid LAS (Loan Against Shares)
n Fund houses which can withstand sudden surge in
redemption without impacting the quality of the portfolio.
n Investors with an agenda of long-term capital gain should
avoid schemes with large corporate investments.
n Reasonable part should be invested in FMPs with AAA
portfolio to avoid duration risk and corpus related issues.
n Well-diversified portfolio of low to moderate duration
with high credit quality schemes with large fund houses
and large schemes which manage the above risks with the
non-corporate investors in focus.